Determining how much business credit your business will need
You have taken the first step and started a business or have a business that is up and running. In some cases, you may be at the helm of a major organization and are planning for the next fiscal year. Imagine it is December 31 and your sales manager, if you do not handle sales and marketing on your own, present you with a sales forecast and this years sales figures. Like many other business owners and organization financial managers, you are charged with the daunting task of determining how much business credit is needed to keep the company afloat for the next year given the profits earned to date.
This is no easy task. Obtaining business credit is not as simple as delving into a personal savings account. Banks and other lenders are often reluctant to lend money to new or struggling banks and prefer to finance firms with operating histories that span at least five years and can maintain a strong sales record. To circumvent this dilemma you may consider applying to the Small Business Administration’s loan guarantee program, which guarantees loans to first-time and small businesses. But nearly all business credit is given to business owners with a FICO score of at least 680 points. As you may already know the FICO score reflects your business or your credit-worthiness based upon factors such as payment history, liens, judgments, and account balances.
After reviewing a FICO score, take some time and look at your financial statements or your operating accounting cash flow control form to determine your actual expenses and realized net revenues and net profits. Review your weekly, monthly, and even annual payroll and salary expense reports. Also go over your mortgage or rent payments, inventories and inventory level, and supply expenses. For your inventory levels, be specific. Do not just glance at the monthly or weekly levels of inventory. Also consider how much you spend to store the goods and the periodic demand for the goods. In some cases, you may find that demand for your goods are higher in certain time frames than others and thus may need more funds to cover these spikes in consumer demand. Also, be sure to take into your deliberations that extra staffers may be needed at busier times of the year than at others when examining inventory.
Finally, understand your cash flow. What overhead items require cash payments and which accounts are paid by credit? Cash on delivery (COD) are required to pay for truck deliveries and some supplies while rent and salaries are paid by check from a bank account. In other instances, new equipment can be purchased using a business credit card. Business owners often fail to assess their real need for cash versus credit payment items on their financial statements. However, by not addressing this issue, many businesses owners find that cash flows dwindle quickly when every dollar is not recorded and the means of how each item is paid for. These determinations will ascertain the type of business credit to consider when cash flow decreases.
Determining how much business credit your firm will need is still a complex task. Although you have assessed your real cash inflows and outflows through a review of your financial statements and cash flow control forms and know your FICO score, you need to decide the type of loan you need and the amount of financing you qualify for. There are three loan types to consider-collateral, secured, and unsecured loans. Collateral is the asset that a lender can confiscate or hold if payment is not forthcoming. Examples include accounts receivable and home equity. Secured loans are loans that have a guarantee for payments, such as auto payments or mortgages. Business assets or personal holdings, on the other hand, do not secure unsecured loans. Examples of unsecured loans include a line of credit or credit cards. Collateral-based and secured loans are harder to obtain and often require the lender to review such variables as the number of years your business has been in operation and the size of your firm. Unsecured loans using credit cards are the option many business owners choose to finance business operations, however, this choice can be very costly depending upon repayment and annual fees.
Like many business owners, you may also consider raising capital through ownership of your business. Such action, however, requires a change of business structure to c-corporation and the establishment of a Board of Directors, if your business does is not already incorporated accordingly. Other options for obtaining business credit include angel investors, however, this alternative requires a solid business plan and at between five to seven years of shared ownership. The final source that many small business owners are seeking is online person networks such as prosper.com or lendingclub.com. This selection is ideal for short-term loans with roughly 10%-15% interest. Such loans are easier to obtain than many secured loans. Remember, for your business to grow, periodic cash infusions are required if there is insufficient cash flow generated from daily operations. Pick the alternative business credit funding options carefully.